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TMI Blog2011 (10) TMI 406X X X X Extracts X X X X X X X X Extracts X X X X ..... ess, house property, capital gains and other sources. 4. In the assessment year in question, the assessee had declared total income of Rs. 20,92,400/-. The said return of income included long term capital gains arising from the sale of a residential flat bearing No.1202-A ('capital asset' for short) at Chaitanya Towers, Prabhadevi, Mumbai. The said flat was originally purchased by the daughter of the assessee ('previous owner' for easy reference) on 29/1/1993 at a cost of Rs. 50,48,350/-. By a gift deed dated 1/2/2003, the previous owner gifted the said capital asset to the assessee. On 30/6/2003, the assessee sold the said capital asset for a total consideration of Rs. 1,10,00,000/- and offered the long term capital gains to tax. 5. During the assessment proceedings, the assessee contended that though the capital asset in question was acquired by the assessee under a gift deed dated 1/2/2003 and transferred on 30/6/2003, under Section 48 read with Section 49 and Section 2(42A) of the Income Tax Act, 1961 ('the Act' for short), the gains arising therefrom were liable to be computed as long term capital gain, by deducting from the total consideration receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the asset was held by the previous owner in the period for which the asset was held by the assessee under a gift or will, is for the limited purpose of determining as to whether the asset was held as a short term capital asset or long term capital asset and that the said fiction cannot be applied in determining the indexed cost of acquisition in view of the express language used in Explanation (iii) to Section 48 of the Act. It is contended that to determine the 'indexed cost of acquisition' what is relevant under Explanation (iii) to Section 48 of the Act is the cost inflation index for the first year in which the capital asset was held by the assessee and not the first year in which the capital asset was held by the previous owner. Accordingly, it is contended that when the words used in Explanation (iii) to Section 48 of the Act are clear and unambiguous, it would not be proper to interpret Section 48(iii) of the Act by importing the meaning given in Explanation 1(i)(b) to Section 2(42A) of the Act. 9. In support of the above contention, Mr. Chatterjee relied upon a decision of the Mumbai Bench of the ITAT in the case of Dy. CIT v. Kishore Kanungo reported in (2006) 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost of any improvement thereto. Where the assessee acquires any capital asset under a gift or will without incurring any cost of acquisition, there would be no capital gains liability. However, Section 49(1)(ii) of the Act provides that in the case of an assessee acquiring an asset under a gift or will, the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the asset incurred or borne by the previous owner or the assessee as the case may be. Thus, on account of the deeming fiction contained in Section 49(1)(ii) of the Act, gains arising on transfer of a capital asset acquired by the assessee under a gift or will would arise. In such a case, the capital gains under Section 48 of the Act would have to be determined by deducting from the total consideration received by the assessee, inter alia the deemed cost of acquisition. 12. Where the gains are long term capital gains (other than long term capital gains arising to a non resident from the transfer of shares in, debentures of an Indian Company), then, as per the second proviso to Section 48 of the Act, the capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowing amounts, namely:- (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the asset and the cost of any improvement thereto; Provided that................. Provided further that where long-term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the words "cost of acquisition" and "cost of any improvement", the words "indexed cost of acquisition" and "indexed cost of any improvement" had respectively been substituted: Provided also................. Provided also................. [Provided also .................] Explanation - For the purposes of this Section, - (i)............ (ii)........... (iii) "indexed cost of acquisition" means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital asset from 29/1/1993, then, naturally in determining the indexed cost of acquisition under Section 48 of the Act, the assessee must be treated to have held the asset from 29/1/1993 and accordingly the cost inflation index for 1992-93 would be applicable in determining the indexed cost of acquisition. 18. If the argument of the revenue that the deeming fiction contained in Explanation 1(i)(b) to Section 2(42A) of the Act cannot be applied in computing the capital gains under Section 48 of the Act is accepted, then, the assessee would not be liable for long term capital gains tax, because, it is only by applying the deemed fiction contained in Explanation 1(i)(b) to Section 2(42A) and Section 49(1)(ii) of the Act, the assessee is deemed to have held the asset from 29/1/1993 and deemed to have incurred the cost of acquisition and accordingly made liable for the long term capital gains tax. Therefore, when the legislature by introducing the deeming fiction seeks to tax the gains arising on transfer of a capital asset acquired under a gift or will and the capital gains under Section 48 of the Act has to be computed by applying the deemed fiction, it is not possible to accept th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t held by the assessee' is not defined and, therefore, in the absence of any intention to the contrary the expression 'asset held by the assessee' in clause (iii) of the Explanation to Section 48 of the Act has to be construed in consonance with the meaning given in Section 2(42A) of the Act. If the meaning given in Section 2(42A) is not adopted in construing the words used in Section 48 of the Act, then the gains arising on transfer of a capital asset acquired under a gift or will be outside the purview of the capital gains tax which is not intended by the legislature. Therefore, the argument of the revenue which runs counter to the legislative intent cannot be accepted. 21. Apart from the above, Section 55(1)(b)(2)(ii) of the Act provides that where the capital asset became the property of the assessee by any of the modes specified under Section 49(1) of the Act, not only the cost of improvement incurred by the assessee but also the cost of improvement incurred by the previous owner shall be deducted from the total consideration received by the assessee while computing the capital gains under Section 48 of the Act. The question of deducting the cost of improvement in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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